02282cam a22002657 4500001000600000003000500006005001700011008004100028100002900069245011700098260006600215490004100281500001900322520109300341530006101434538007201495538003601567690009501603690010701698700002001805710004201825830007601867856003701943856003601980w6924NBER20161209093307.0161209s1999 mau||||fs|||| 000 0 eng d1 aBlanchard, Olivier Jean.10aWage Dynamicsh[electronic resource]:bReconciling Theory and Evidence /cOlivier Jean Blanchard, Lawrence Katz. aCambridge, Mass.bNational Bureau of Economic Researchc1999.1 aNBER working paper seriesvno. w6924 aFebruary 1999.3 aU.S. macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment. In contrast, most theories of wage determination imply a negative relation between the level of wages and unemployment. In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations. We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled. We show the constraints that such a condition imposes on the determinants of workers' reservation wages as well as the relative importance of workers' outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an "error correction" term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables -- from real interest rates to oil prices to payroll taxes -- on the natural rate of unemployment. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE31 - Price Level • Inflation • Deflation2Journal of Economic Literature class. 7aJ64 - Unemployment: Models, Duration, Incidence, and Job Search2Journal of Economic Literature class.1 aKatz, Lawrence.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w6924.4 uhttp://www.nber.org/papers/w692441uhttp://dx.doi.org/10.3386/w6924